The idea that a rising gold price is good for gold miners is intuitively easy to grasp. But to understand just how good, you have to see the numbers.
Consider the second-quarter reports of mid-tier gold miners Pretium Resources and Great Panther Mining.
Beginning with Pretium, ounces of gold sold went up slightly compared to last year’s second quarter and the average price the company received for each ounce of metal went up somewhat more, by 32%. Then the magic of operating leverage kicked in. Revenue rose by 47%, operating earnings more than doubled and net earnings more than tripled. Free cash flow – the ultimate point of the whole exercise – rose by 105%.
The improvement was even more dramatic for Great Panther, since in last year’s second quarter it was unprofitable. A 24% increase in ounces sold combined with a 32% increase in the average selling price to increase operating earnings up by 722% and pull net earnings from a $5.7 million loss to an $8.5 million gain. Operating cash flow soared from a loss of $5 million to a gain of $19 million.
In other words, a $400 increase in the price of gold converted a cash-hemorrhaging loser into a high-flying growth company.
This is the kind of big-percentage-gain profile that traders love, so it’s not a surprise that both companies’ share prices are at 12-month highs. Pretium rose 25% today.
And the story gets even better. The current gold price is $300 above the Q2 average, so if the metal just sits there for the next twelve months, these two miners – along with most of their peers – will report an unbroken string of jaw-dropping comparisons for another year.
The likely result: Gold and silver mining stocks will jump off the screens of anyone tracking earnings and/or price momentum. And since momentum-chasing capital tends to dwarf the trickle that normally flows into this obscure sector, the action ought to be fun for anyone who’s already invested here.